We are currently teaching at the Harvard Law School, and one of us was formerly a Vice Chairman of Fidelity Investments.

We appreciate the opportunity to comment on the Commission's release proposing that designated officers of registered investment companies certify their shareholder reports, and file such reports on new Form N-CSR under Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 (1934 Act). The release would also require the certification and filing of existing Form N-SAR pursuant to Section 302 of the Sarbanes-Oxley Act ("Act").

As explained below, we believe that the proposals in the release go beyond the wording in Section 302 of the Act. While it is unclear whether Section 302 was intended to apply to any shareholder reports of registered investment companies, we believe that a sensible interpretation of Section 302 would limit certification to the financial statements and condensed financial information contained in the annual and semi-annual shareholder reports of registered investment companies.

I. Scope of Section 302 As Applied to Registered Investment Companies

Section 302 of the Act would require a public company's principal executive officer and principal financial officer to certify information contained in the annual and quarterly reports filed by that company under Section 13(a) or 15(d) of the Securities Exchange Act. The only report currently filed by registered investment companies under either of these sections is Form N-SAR. That Form does not include a fund's financial statements. Rather, it contains limited amounts of financial data together with a significant amount of non-financial information such as a fund's minimum initial investment, account maintenance fees and custodial arrangements.

Because Form N-SAR does not contain a fund's financial statements, this suggests that Congress did not intend Section 302 to apply to mutual funds. Congress may have inadvertently applied Section 302 to Form N-SAR, which happens to be filed under Section 15(d) of the 1934 Act. Indeed, there is nothing in the legislative history of Section 302 addressing concerns about the financial statements of mutual funds. Congress was primarily concerned with the financial statements of companies publicly traded on stock exchanges or the over-the-counter market - financial statements that are all filed under the 1934 Act.

Thus, we believe that the Commission could take either of two reasonable alternatives:

1) apply Section 302 as literally written only to Form N-SAR of a registered investment company, or

2) exempt Form N-SAR of a registered investment company from Section 302 because the Form is not responsive to the concerns underlying Section 302.

Unfortunately, the Commission is proposing neither of the above alternatives. Instead, it is proposing to apply the certification requirements of Section 302 not only to existing Form N-SAR but also to new Form N-CSAR, which would cover all the information in the annual and semi-annual reports of mutual funds.

To begin with, we doubt that this extension of the certification requirements of the Act is consistent with the wording of Section 302. The Commission attempts to circumvent the 1934 Act references in the wording of Section 302 by requiring registered investment companies to file new Form N-CSR under Section 13(a) or 15(d) of the 1934 Act. However, such a filing could not have been contemplated by Congress since registered investment companies filed only Form N-SAR under Sections 13(a) or 15 (d) of the 1934 Act at the time Congress passed the Act.

In addition, the Commission contradicts its own position by proposing to apply the certification requirement in new Form N-CSAR regardless of whether the registered investment company is subject to Section 13(a) or 15(d) of the 1934 Act. Section 13(a) does not apply to issuers unless they are registered on a national securities exchange, and Section 15(d) does not apply to investment companies that are held of record by less than 300 persons and do not have a currently effective registration statement.

As to legislative intent, the Commission's release explains its rationale for extending certification to new Form CSAR:

"that certification of Form N-SAR alone is not sufficient to fully implement the intent of the certification requirement of Section 302 of the Sarbanes-Oxley Act for registered management investment companies. This certification requirement was intended to improve the quality of the disclosure that a company provides about its financial condition in its periodic reports to investors. For registered management investment companies, the required reports to shareholders, rather than Form N-SAR, are the primary vehicle for providing financial statements to investors. We believe that the information in these reports to shareholders should be certified."

In the above explanation, the Commission appears to confirm that Congress inadvertently caught investment companies in the certification requirements of Section 302. The Commission recognizes that Form N-SAR, the only form currently filed under the sections of the 1934 Act cited in Section 302, constitutes an inappropriate vehicle for providing financial statements to fund investors.

Moreover, the Commission's release cites legislative concerns about financial statements of publicly traded companies, which "often necessarily require accompanying disclosures in order to apprise investors of the company's true financial condition and results of operations." 148 Cong. Rec. S6760 (July 15, 2002). However, such legislative concerns do not generally apply to financial statements of investment companies. These are relatively straightforward documents, not involving complex issues such as revenue recognition or accounting for compensation, that can be understood without the benefit of a lengthy management comment.

If the Commission is persuaded by legal or policy arguments to extend Section 302 to shareholder reports of registered investment companies, then it should limit the certification requirements to the financial statements and condensed financial information contained in such reports. These two items of information constitute the closest approximation to the financial information that is certified by publicly traded companies under Section 302 of the Act.

By contrast, the Commission should not require fund officers to certify other information often voluntarily included in shareholder reports of registered investment companies. Such reports often contain additional voluntarily information like the President's letter or interviews with portfolio managers. This information is textual in nature, and does not relate to the fund's financial statements; therefore, this information is not the type of disclosure that Section 302 was intended to cover for any company. Moreover, if the Commission imposes a certification requirement on this type of voluntary information in annual and semi-annual reports of registered investment companies, such information will probably be sent separately as supplemental sales literature - to the detriment of fund shareholders.

Similarly, the Commission should not require fund officers to certify Item 5 of Form N-1A, the Management's Discussion of Fund Performance (MDFP). The MDFP, unlike a MD&A for a public company, does not attempt to explain the financial statements of the fund. Instead, the MDFP is a textual comment on the factors that materially influenced the fund's performance such as trends in the stock market, overweighing of certain securities or investment techniques employed by the portfolio manager.

Moreover, the MDFP can be included either in a fund's prospectus or in a fund's annual or semi-annual reports. If the Commission requires certification of the MDFP in the fund's periodic reports, then it will probably be moved from these reports to the fund's prospectus. Again such a move would be against the best interests of fund investors, who are more likely to read the MDFP when included as part of the fund's annual and semi-annual reports rather than as part of the fund's prospectus.

Thank you again for this opportunity to comment on the Commission's proposal for certification of shareholder reports by registered investment companies.